The Joys of Compounding, by Gautam Baid (introduction)

—ARNOLD VAN DEN BERG, FOUNDER OF CENTURY MANAGEMENT

—THOMAS A. RUSSO, MANAGING MEMBER, GARDNER RUSSO & GARDNER LLC “Baid provides a foundational framework on investing that is required reading for all investors. I highly recommend The Joys of Compounding, the most comprehensive investing book I have ever read.”

—PAUL LOUNTZIS, PRESIDENT OF LOUNTZIS ASSET MANAGEMENT

GAUTAM BAID , CFA, is portfolio manager at an SEC-registered investment advisor based in Salt Lake City, Utah. Previously, he served at the Mumbai, London, and Hong Kong offices of Citigroup and Deutsche Bank as senior analyst in their healthcare investment banking teams.

Baid is a CFA charterholder and member of CFA Institute, and in 2018 and 2019 he was profiled in Morningstar’s Learn from the Masters series.

Learn more at

www.TheJoysOfCompounding.com and connect on Twitter @Gautam__Baid.

Praise for

The

JOYS of C OMPOUNDING “Gautam’s book is wonderfully insightful. It is truly a pleasure to read and a reminder of some of the most essential tenets of sound investing.”

—SANJOY BHATTACHARYYA, MANAGING PARTNER, FORTUNA CAPITAL “Gautam is a marvelous role model because he is such a joyful and passionate student of worldly wisdom. In this book, he gives us a powerful reminder of how enriching it is to dedicate ourselves to the pursuit of continuous, lifelong learning.”

—WILLIAM GREEN, AUTHOR OF THE GREAT MINDS OF INVESTING AND BEYOND RICH “An instant classic! Gautam’s book is the definitive guide to lifelong learning for investors and anyone seeking to reach their full potential. A must-read.”

—JOHN MIHALJEVIC, CHAIRMAN OF MOI GLOBAL $27.95

COLUMBIA UNIVERSITY PRESS

/ NEW

CUP.COLUMBIA.EDU Author photo: © Surf and Snow Country Images

YORK

The Heilbrunn Center for Graham and Dodd Investing

JOYS of C OMPOUNDING

“Gautam Baid presents exactly the types of examples and insights from fabled investment practitioners that I believe can help investors avoid common yet predictable traps.

The Joys of Compounding is a most useful reference for lifelong investment learning.”

BAID

The

“Over the years, as I’ve realized the importance of learning through wisdom instead of suffering, my favorite gift has been to give a person a great book.

This book is going to go to the top of that list.”

“This edition benefits from a clearer focus on Gautam’s voice and insights as well as offering a fresh opportunity to learn and relearn those key lessons that will make us better investors and better human beings.”

—FROM THE FOREWORD BY GUY SPIER

JOYS

The

of

COMPOUNDING The Passionate Pursuit of Lifelong Learning

GAUTAM BAID REVISED AND UPDATED

VALUE INVESTING IS NOT JUST A system for success in the market. It is also an intellectual toolkit for achieving a deeper understanding of the world. In The Joys of Compounding, the value investor Gautam Baid builds a holistic approach to value investing and philosophy from his wide-ranging reading, combining practical approaches, self-cultivation, and business wisdom.

Distilling investment and life lessons into a comprehensive guide, Baid integrates the strategies and wisdom of preeminent figures whose teachings have stood the test of time. Drawing on the work of investing greats like Warren Buffett, Charlie Munger, and Ben Graham, as well as philosophers and scholars, he artfully interweaves the lessons learned from his many teachers. Baid demonstrates their practical applications in the areas of business, investing, and decision making and also shows that these ideas can be applied to one’s own life with just as much reward.

A celebration of the value investing discipline, this book also recounts Baid’s personal experiences, testifying to his belief that the best investment you can make is an investment in yourself. The Joys of Compounding offers curated reflections on life and learning for all investors, investment enthusiasts, and readers seeking a dose of practical wisdom.

This revised and updated edition highlights Baid’s distinctive voice.

CHAPTER 1

INTRODUCTION: THE BEST INVESTMENT YOU CAN MAKE IS AN INVESTMENT IN YOURSELF

I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up and boy does that help, particularly when you have a long run ahead of you.

—Charlie Munger

I

n his 2007 University of Southern California School of Law commencement speech, Charlie Munger said that lifelong learning is paramount to long-term success. Without it, we won’t succeed, because we won’t get far based on what we already know.

If you take Berkshire Hathaway, which is certainly one of the best-regarded corporations in the world and may have the best long-term investment record in the entire history of civilization, the skill that got Berkshire through one decade would not have sufficed to get it through the next decade with the achievements made. Without Warren Buffett being a learning machine, a continuous learning machine, the record would have been absolutely impossible.1

Most people go through life not really getting any smarter. But you can acquire wisdom if you truly want to obtain it. In fact, a simple formula, if followed, is almost certain to make you smarter over time. It’s simple but not easy.

2 Introduction: The Best Investment You Can Make Is an Investment in Yourself

It involves a lot of hard work, patience, discipline, and focus.

Read. A lot.

This is how Warren Buffett, one of the most successful people in the business world, describes his typical day: “I just sit in my office and read all day.”2 Sitting. Reading. Thinking.

Buffett credits many of his successful decisions to his incredible reading habit. He estimates that he spends as much as 80 percent of his day reading and thinking.

In a 2014 letter to Berkshire shareholders, Munger outlined his expectations of the chair of the firm: “His first priority would be reservation of much time for quiet reading and thinking, particularly that which might advance his determined learning, no matter how old he became.”3 Once, when asked about the key to his success, Buffett held up stacks of paper and said, “Read 500 pages like this every day. That’s how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.”4 All of us can work to improve our knowledge, but most of us won’t put in the effort.

More important than the will to win is the will to prepare.

—Charlie Munger

Self-improvement is the ultimate form of investing in oneself. It requires devoting time, money, attention, and hard effort now for a payoff later, sometimes in the far distant future. A lot of people are unwilling to make this trade-off because they crave instant gratification and desire instant results.

These short-term costs, when applied the right way along an axis of time, offer an exponential payoff when applied over a long life (figure 1.1).

“Compound interest,” Albert Einstein reputedly said, “is the most powerful force in the universe.”

So what happens when you apply such an incredible power to knowledge building?

You become a learning machine.

One person who took Buffett’s advice, Todd Combs, now works for the legendary investor. After hearing Buffett talk, Combs started keeping track of what he read and how many pages he was reading.

Eventually finding and reading productive material became second nature, a habit. As he began his investing career, he would read even more, hitting 600, 750, even 1,000 pages a day. Combs discovered that Buffett’s formula worked, giving him more knowledge that helped him with what became his primary job—seeking the truth about potential investments.5

Introduction: The Best Investment You Can Make Is an Investment in Yourself

If the probability and/or objective is great, work, work, work...

Relative performance

3

e rv Cu J ...and you may succeed in an epic way Original performance level

Time

Figure 1.1 This is compounding in action. This illustrates what I experienced in 2018,

after many years of determined efforts amid repeated setbacks. Resilience is a superpower.

Source: “5 Things I Learned from Elon Musk on Life, Business, and Investing,” Safal Niveshak (blog), September 16, 2015, https://www.safalniveshak.com/elon-musk-on-life-business-investing/.

Reading five hundred pages a day might not be feasible for you. If, however, you can find ways to read (or to listen to an audiobook) during your day, at night, or on the weekends, you are likely to see multiple benefits.

Research published in the Journal of American Academy of Neurology has shown that people who engage in mentally stimulating activities like reading experience slower memory decline than those who do not. Reading is also linked with higher emotional intelligence, reduced stress, a wider vocabulary, and improved comprehension.

If you think of your mind as a library, three things should concern you: 1. The accuracy and relevance of the information you store.

2. Your ability to find or retrieve that information on demand.

3. Your ability to put that information to use when you need it—that is, your ability to apply it.

Having a repository of knowledge in your mind is pointless if you can’t find and apply its contents.

Here, I am reminded of what Sherlock Holmes said in The Reigate Puzzle: “It is of the highest importance in the art of detection to be able to recognize, out of a number of facts, which are incidental and which vital. Otherwise your energy and attention must be dissipated instead of being concentrated.”6 So be very careful of what you take in.

4

Introduction: The Best Investment You Can Make Is an Investment in Yourself

The Passionate Pursuit of Lifelong Learning The game of life is the game of everlasting learning.

—Charlie Munger

Formal education will make you a living; self-education will make you a fortune.

—Jim Rohn

Rich people have small TVs and big libraries. Poor people have small libraries and big TVs. —Zig Ziglar

Even after achieving such enormous success, Buffett continues to read for five to six hours every day. He often credits this good habit for much of his success in life. Reading allows him to learn the lessons of others.

What many people see as a three-hundred-page book is often the accumulation of thousands of hours and decades of work. Where else can you get the entire life’s work of someone in the space of a few hours?

The most talented people in any given field are self-educated. Contrary to some belief, it doesn’t mean grinding away without teachers. Rather, it’s about drawing from your raw material and building out of it from a large number of sources. Books. Experiences. People. Everything in life can be a teacher when you possess the right mind-set. The benefits of recognizing just a few extra learning opportunities compound over time and unlock promising possibilities in the future.

The best way to learn something is to try to do it, but the next best way to learn is from someone who has already done it. This is the importance of reading and vicarious learning.

Understanding and learning from successful people provides insights about approaching life with the right attitude, developing a sound work ethic, and improving the quality of our decisions on a continuous basis.

In Michael Eisner and Aaron Cohen’s book Working Together: Why Great Partnerships Succeed, Buffett talked about his and Munger’s fierce dedication to lifelong learning: I don’t think any other twosome in business was better at continuous learning than we were. . . . And if we hadn’t been continuous learners, the record

Introduction: The Best Investment You Can Make Is an Investment in Yourself

5

wouldn’t have been as good. And we were so extreme about it that we both spent the better part of our days reading, so we could learn more, which is not a common pattern in business. . . . We don’t read other people’s opinions. We want to get the facts, and then think.7

In the following excerpt from an October 2013 interview in Fortune, Buffett and Munger discuss how they were able to leap ahead of their peers and competitors: Munger: We’ve learned how to outsmart people who are clearly smarter [than we are].

Buffett: Temperament is more important than IQ. Munger: The other big secret is that we’re good at lifelong learning. Warren is better in his seventies and eighties, in many ways, than he was when he was younger. If you keep learning all the time, you have a wonderful advantage.8

Is there a better investment than self-improvement? Here is what Buffett has had to say on the topic: “The best investment you can make is an investment in yourself.”

“The more you learn, the more you’ll earn.”

“Learn from your mistakes, and the mistakes of others.”9

Self-improvement is the best way to spend some of your time every day. And finding the time to read is easier than you think. One way to make this happen is to carve out an hour of each day just for yourself. If you need inspiration, consider how Munger would sell himself the best hour of each day.

In an interview for his authorized biography, The Snowball, Buffett shared this story about Munger: Charlie, as a very young lawyer, was probably getting $20 an hour. He thought to himself, “Who’s my most valuable client?” And he decided it was himself.

So he decided to sell himself an hour each day. He did it early in the morning, working on these construction projects and real estate deals. Everybody should do this, be the client, and then work for other people, too, and sell yourself an hour a day.10

It is essential to understand the opportunity cost of this one hour. On one hand, you can indulge in getting dopamine-laced rushes from emails and social media feeds while multitasking. On the other hand, you can dedicate the time to deep work and self-improvement. An hour’s time spent acquiring in-depth knowledge about an important principle pays off in the long run. This current

6

Introduction: The Best Investment You Can Make Is an Investment in Yourself

investment is minuscule compared with the significant net present value that results over a lifetime. It is akin to buying a dollar for less than one cent. This is why good books are the most undervalued asset class: the right ideas can be worth millions, if not billions, of dollars over time.

Time is a resource that becomes increasingly scarce for everyone with each passing second. Learn to value your time highly. Buffett avoids long daily commutes to work for this very reason. No matter how much money you have, you can’t buy more time. We each have only twenty-four hours available to us every day. Time is the currency of life that appreciates in value the more it’s spent. Minimize your commute time to work and outsource all of the noncore time-consuming menial tasks to free up valuable time for self-development.

The extra money spent on these small luxuries will pinch initially, but over time, you will realize that it was well worth it. In the long term, the daily investment in learning something new and improving yourself goes a long way. So, the best investment of time is to invest in personal development. I hope the time you are investing in reading this book today yields positive results for the rest of your life. After having successfully achieved financial freedom through my passionate pursuit of lifelong learning, I can happily say that I am a better investor because I am a lifelong learner, and I am a better lifelong learner because I am an investor.

It seems fitting to end this chapter with the golden words of wisdom from two of the greatest learners and thinkers to have ever lived.

An investment in knowledge pays the best interest.

—Benjamin Franklin

Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day.

—Charlie Munger

—ARNOLD VAN DEN BERG, FOUNDER OF CENTURY MANAGEMENT

—THOMAS A. RUSSO, MANAGING MEMBER, GARDNER RUSSO & GARDNER LLC “Baid provides a foundational framework on investing that is required reading for all investors. I highly recommend The Joys of Compounding, the most comprehensive investing book I have ever read.”

—PAUL LOUNTZIS, PRESIDENT OF LOUNTZIS ASSET MANAGEMENT

GAUTAM BAID , CFA, is portfolio manager at an SEC-registered investment advisor based in Salt Lake City, Utah. Previously, he served at the Mumbai, London, and Hong Kong offices of Citigroup and Deutsche Bank as senior analyst in their healthcare investment banking teams.

Baid is a CFA charterholder and member of CFA Institute, and in 2018 and 2019 he was profiled in Morningstar’s Learn from the Masters series.

Learn more at

www.TheJoysOfCompounding.com and connect on Twitter @Gautam__Baid.

Praise for

The

JOYS of C OMPOUNDING “Gautam’s book is wonderfully insightful. It is truly a pleasure to read and a reminder of some of the most essential tenets of sound investing.”

—SANJOY BHATTACHARYYA, MANAGING PARTNER, FORTUNA CAPITAL “Gautam is a marvelous role model because he is such a joyful and passionate student of worldly wisdom. In this book, he gives us a powerful reminder of how enriching it is to dedicate ourselves to the pursuit of continuous, lifelong learning.”

—WILLIAM GREEN, AUTHOR OF THE GREAT MINDS OF INVESTING AND BEYOND RICH “An instant classic! Gautam’s book is the definitive guide to lifelong learning for investors and anyone seeking to reach their full potential. A must-read.”

—JOHN MIHALJEVIC, CHAIRMAN OF MOI GLOBAL $27.95

COLUMBIA UNIVERSITY PRESS

/ NEW

CUP.COLUMBIA.EDU Author photo: © Surf and Snow Country Images

YORK

The Heilbrunn Center for Graham and Dodd Investing

JOYS of C OMPOUNDING

“Gautam Baid presents exactly the types of examples and insights from fabled investment practitioners that I believe can help investors avoid common yet predictable traps.

The Joys of Compounding is a most useful reference for lifelong investment learning.”

BAID

The

“Over the years, as I’ve realized the importance of learning through wisdom instead of suffering, my favorite gift has been to give a person a great book.

This book is going to go to the top of that list.”

“This edition benefits from a clearer focus on Gautam’s voice and insights as well as offering a fresh opportunity to learn and relearn those key lessons that will make us better investors and better human beings.”

—FROM THE FOREWORD BY GUY SPIER

JOYS

The

of

COMPOUNDING The Passionate Pursuit of Lifelong Learning

GAUTAM BAID REVISED AND UPDATED

VALUE INVESTING IS NOT JUST A system for success in the market. It is also an intellectual toolkit for achieving a deeper understanding of the world. In The Joys of Compounding, the value investor Gautam Baid builds a holistic approach to value investing and philosophy from his wide-ranging reading, combining practical approaches, self-cultivation, and business wisdom.

Distilling investment and life lessons into a comprehensive guide, Baid integrates the strategies and wisdom of preeminent figures whose teachings have stood the test of time. Drawing on the work of investing greats like Warren Buffett, Charlie Munger, and Ben Graham, as well as philosophers and scholars, he artfully interweaves the lessons learned from his many teachers. Baid demonstrates their practical applications in the areas of business, investing, and decision making and also shows that these ideas can be applied to one’s own life with just as much reward.

A celebration of the value investing discipline, this book also recounts Baid’s personal experiences, testifying to his belief that the best investment you can make is an investment in yourself. The Joys of Compounding offers curated reflections on life and learning for all investors, investment enthusiasts, and readers seeking a dose of practical wisdom.

This revised and updated edition highlights Baid’s distinctive voice.